Balance of Payments

Hi I have a question about the Balance of payments.

I don't seem to understand why the balance of payments must equal to zero? Or moreoever what exactly must equal to zero?

As far as I have read it so far, the current account + financial and capital account = 0.

This does not make sense to me at all. If there is a deficit in the current account, for a country, this does not mean that it has to have a surplus in its financial and capital account? Other nations do not have to invest into the country just because they have excess reserves of that countries currency due to the deficit of its current account. How does this make sense at all?

Think of it this way, if a country has a massive debt in its current account, it has to somehow finance it. The only way possible for this is for a surplus in the capital account (Or depending on the textbook, the summation of the financial and capital account).

Cuz now you have money to fund your investments, so you can use that money to research, purchase assests, etc. =]

(Note, there are FAR more factors other than this and the previous example I posted.).

The BOP is essentially like an accounting book, what goes in must go out, and what goes out must come in. Everything must balance otherwise something wrong. If you have a surplus, this means someone else has a deficit. There's a fixed amount of cash in this world and everything must circle around.

Yeah thats the theory but i dont see how it would fit with the application...

Lets say in the beginning of a year, a country is making a current account surplus. Then, before that surplus is spend in foreign investments etc, the country is going through a deep recession adn consumer confidence is so low, that everyone decides to save their cash instead of investing it else where. Now where does this capital account deficit come from then?

Edit: It's highly unlikely for a country to experience a current account surplus and be in a recession at the same time. Also note that the money you get from a current account surplus can be used to purchase other countries bonds (which hold value) and still allow money to circulate around. This causes a negative effect on ur financial account.

Yes yes I understand the "can". I know that it is likely that the BoP is equal to zero etc.

But why "must" it equal to zero?

Because if it doesn't equal to 0 then it means money is missing or somehow money has been magically produced.

It doesn't always have to equal zero when you are looking at trade on an international scale- I've just done my dissertation on medieval English and Scottish economics, and England actually ran quite a high balance of payments surplus, which made it extremely wealthy. They exported more in value than they imported, which brought absolutely loads of cash into the country, and drained it from its trading partners.

But on the scale I think you mean, then it would be as others have said- cash can't simply go AWOL. It has to come and go from somewhere, and it needs to be balanced.

You are talking about a balance of trade surplus, not balance of payments surplus it seems. But on all the other sites it states that BoP must always equal to zero, which i cannot seem to understand. And the logic "it has to come from somewhere, and it needs to be balanced" doesnt really explain it imo. Since, as i stated i think that It is theoretically possible that a country has a surplus in current account, and decides to save all of the surplus instead of investing it. So how is this explained?

A country doesn't simply "save" money. THEORETICALLY, you're correct. I have a surplus in income, I'll just save it. Reality doesn't work that way. And the argument that money can come from previous savings isn't valid. You don't simply hand off money to another country and then it's gone forever. The world economy involves complex transactions between individuals and it'll eventually come back to you in some shape.

Well, no, the applicable term is still "balance of payments", but with specific reference to trade, as the term itself is simply the record of transactions between one country and the rest of the world.

But as for your main question (before we digress ), if a country allowed for its surplus to stagnate, rather than re-invest it, (I believe) it would end up losing money. You need to keep re-investing to keep up with inflation and to ensure the books keep balancing, so saving isn't as much of an option. Also, if a country decided to not dip into the money it brought in, how would goods etc from abroad be purchased?

Yes I see that is it realistic that the BoP would be equal to zero. But I want to understand why it, from a logical point of view, equals to zero (this means in all the theoretic situations it is equal to zero). Do you know an explanation which does not refer to the fact that money comes from somewhere, as this isnt valid as bop is remeasured each year. Let's take China and USA. In the beginning of year 2014, usa imports a lot frmo china without exporting anything to china. So china has a huge current accoutn surplus. Now if it decides NOT to invest to USA, then HOW does its BoP balance?